Home Equity Loans: What's Best for You

When you own a home, you're building equity. And a lot of people use that equity as collateral to borrow money. Especially when you're borrowing for a big purchase.

Home equity loans offer tax deductible interest, lower rates and longer payback, so they can be a smart idea. But the first thing you need to think about when you're drawing up that borrowing plan is which type of equity loan you're looking for…a regular loan, or a line of credit.

What's the difference?

A home equity loan is really just a second mortgage, and it acts like a first mortgage. You lock in an interest rate, your payments are fixed, and so is the amount of time you have to pay the loan.

A line of credit is more like a credit card. The interest rate can fluctuate, you can draw on it, or not, at your whim, and your payments and length of the loan will change accordingly.

So which should you use?

Well, now that you know the difference, make the loan fit the purpose. In other words, if you're borrowing for a non-recurring expense, like a home addition, use a fixed loan, like a home equity loan. But if you're going to be taking out a little here and paying back a little there, like when for education, a line of credit may make more sense.